The government of India takes numerous measures to reduce the tax burden on taxpayers. This step is crucial to promoting the adoption of the new taxation system. When an Indian citizen earns income in India, they are liable to pay taxes. The progressive tax system ensures that people with a higher income pay a higher tax, while people with a lower income pay a lower tax. So, different income tax slabs are available, and you must pay tax as per your slab.
Table of Contents
Understanding Tax Rebate
Income Tax Rebate under Section 87A
Who Can Claim Income Tax Rebate Under Section 87A?
Incomes Not Eligible For Income Tax Rebate Under New Tax Regime
How to Calculate Income Tax Rebate under Section 87A
Marginal Relief under Section 87A For New Tax Regime
Conclusion
Frequently Asked Question
The income tax rebateis a relief from tax liability, allowing taxpayers to reduce their tax liability. Section 87Aof the Income Tax Act specifies eligibility, guidelines, and rebates for qualified taxpayers. When the income exceeds the threshold limit, the tax will become zero.
The following blog will explain who qualifies for an income tax rebate under Section 87Aand how to claim it.
Understanding Income Tax Rebate
Taxpayers must understand how the rebate differs from tax exemptions and deductions. Tax exemptions refer to cases where the income generated is not subject to tax. You can start by excluding income with tax exemptions for income calculations. Deductions can be claimed for certain expenses and investments. You can subtract the exemptions and deductions from the total income to compute the taxable income.
Tax rebates are entirely different from exemptions and deductions. The income tax rebateis applicable to reduce your tax liability. The income tax is calculated based on the net taxable income. The tax rebate applies to the income tax. If the total taxable amount meets the threshold value for the rebate, the rebate will apply. Otherwise, there will be no rebate, and you must pay your tax as per the income tax slabs.
Income Tax Rebate under Section 87A
The income tax rebate under Section 87Awas first introduced in 2013. It was offered as an incentive for taxpayers to pay their taxes promptly. As the rebate applies to the final tax amount, bringing down the tax owed to zero is possible if the rebate covers your tax amount. The tax rebate applies to the total tax amount before the Health and Education Cess is applied.
Ever since tax rebates were introduced, if your taxable income is below the rebate threshold, your tax will automatically become zero. The tax rebate is 100% if the tax amount is below the threshold value. However, if the taxable income exceeds the rebate threshold, the rebate will be NIL, and you must pay the full tax amount.
The rebate motivates low-income earners to file tax returns without worrying about tax payments. You need not pay tax if the amount owed exceeds the rebate threshold. Every few years, the rebate threshold limit has been increasing. Following is a short recap of revisions to the rebate from 2013 to 2024:
Rebate under Old Tax Regime
Tax rebate for FY 2022-23 (AY 2023-24) remains unchanged.
If your taxable incomeis up to Rs. 5,00,000, you can get a maximum tax rebate of Rs. 12,500.
Upto FY 2022-23, the old tax regime is the default regime.
Rebate under New Tax Regime
Rebate limit is increased for FY 2023-24 (AY 2024-25)
If your taxable incomeis up to Rs. 7,00,000, you can get a maximum tax rebate of Rs. 25,000
Marginal relief is applicable under certain conditions
The new income tax regimeis the AY 2024-25 default regime.
If you prefer to follow the new AY 2023-24 tax regime, you can choose the option under Section 115BAC(6).
Who Can Claim Income Tax Rebate Under Section 87A?
The income tax rebateis only available for resident individuals. Other taxpayers, like Hindu Undivided Family (HUF), non-resident individuals (NRIs), and companies, cannot claim tax rebates. Also, super senior citizens who are over 80 years of age are not eligible to claim a rebate.
Incomes Not Eligible For Income Tax RebateUnder New Tax Regime
The new tax regime has increased the threshold limit for rebates and rebate amounts. However, several other factors, apart from your total taxable income, can determine your eligibility for a rebate. As per the new tax regime, the standard 80C deductions and certain exemptions are not allowed. So, if you follow the new income tax regime, you cannot reduce your taxable incomewith deductions and exemptions similar to the old tax regime.
To gain eligibility for tax rebates under the new tax regime as per Section 87A, you cannot have income generated from equity shares, equity mutual funds, or other income sources.
LTCG From Equity Mutual Funds And Equity Shares
When your income source includes Long Term Capital Gain (LTCG) from sale units of equity mutual funds or shares of listed equity shares, you cannot claim a rebate under Section 87Afor the income from LTCG. Such income is taxed at 10% if it is more than Rs. 1,00,000 in a financial year. However, if income is less than Rs. 1,00,000, it is exempt from tax. Also, you can claim a rebate without restriction when you have LTCG from other assets like real estate, capital assets, or unlisted shares. Also, STCG from the sale of equity shares or equity mutual funds will not limit the rebate you can claim.
Consider this example:
Mr. X has a taxable incomeof Rs. 3,30,000, less than the 7,00,000 limit. This income also includes LTCG of Rs. 1,10,000 from selling equity shares. Here, the total tax payable is Rs. 4000, less than the rebate amount of Rs. 25,000 as per the new tax regime. However, Mr. X cannot claim the rebate and pay zero tax. They must pay 10% of the LTCG of Rs. 10,000 (1,10,000-1,00,000) along with a cess of 4%, totaling a tax of Rs. 1040. So, their net tax amount is not zero; it is Rs. 1040.
Special Incomes
Special incomes from gambling winnings, online gaming wins, virtual digital assets (VDA), betting wins, or game show wins are not eligible for tax rebates under Section 87Aof the new tax regime. A flat tax rate of 30% is applicable on the income, along with an additional surcharge and cess.
How to CalculateIncome Tax Rebate under Section 87A
After the new union budget and introduction of the new tax regime from FY 2023-24 (AY 2024-25), the income tax rebatecalculation varies based on whether you have chosen a new or old tax regime.
For the Old Tax Regime
Step 1: Calculate the gross total income, including income from all sources.
Step 2: Deduct deductions and exemptions for which you are eligible, such as 80C, 80D, HRA, LTA, etc.
Step 3: Calculate the net taxable incomeby subtracting deductions and exemptions from gross total income.
Step 4: If net taxable incomeis less than Rs. 5,00,000, you are eligible for a tax rebate under Section 87A, which will be automatically considered during return filing.
Step 5: Your tax payable will be zero if your income is Rs. 5,00,000 or below under the old tax regime.
For the New Tax Regime
Step 1: Calculate the gross total income, including income from all sources.
Step 2: Deduct applicable FY 2022-23 deductions under Section 80CCD (2) for the employer's contribution to the employee's NPS account. Salaried employees get a standard deduction of Rs. 50,000 from FY 2023-24.
Step 3: Calculate net taxable incomeby subtracting applicable deductions from gross total income.
Step 4: If net taxable incomeis Rs. 7,00,000 or lower, you are eligible for a tax rebate under Section 87A, which will be automatically considered during return filing.
Step 5: Your tax payable will be zero if your income is Rs. 7,00,000 or below and there are no special incomes that are not eligible for the rebate.
Examples:
Particulars | Example 1 | Example 2 | Example 3 |
Total Taxable income | 5,00,000 | 7,00,000 | 10,00,000 |
Less: Basic exemption limit | 3,00,000 | 3,00,000 | 3,00,000 |
Taxable incomeafter the basic exemption limit | 2,00,000 | 4,00,000 | 7,00,000 |
Tax payable | 10,000 | 25,000 | 60,000 |
Rebate under Section 87A | 10,000 | 25,000 | Nil |
Balance tax payable | Nil | Nil | 60,000 |
Health and education cess @4% | Nil | Nil | 2400 |
Total tax payable | 62,400 |
Marginal Relief under Section 87AFor New Tax Regime
As per Section 87A, the tax rebate only applies if the total taxable incomeis less than the prescribed limit. Even though the prescribed limit has been increased under the new tax regime for FY 2023-24 and AY 2024-25, a slight increase in income from Rs. 7,00,000 will not automatically remove your tax rebate relief due to marginal relief.
The marginal relief for income tax rebateis a new amendment to Section 87Aapplicable only to the new tax regime. Instead of paying the full tax amount if your income is more significant than Rs. 7,00,000, you can pay only a small amount for the excess income. The tax payable will not exceed the income of more than Rs. 7,00,000. So, the tax you must pay will be less than the difference between your total taxable incomeand Rs. 7,00,000.
It can be easily explained with the following example:
Consider that Mr. X's salary is Rs. 7,70,000 in FY 2023-24, and they have opted for a new tax regime. The standard deduction of Rs. 50,000 will apply, and consider that no other deductions are applicable. So, the total taxable incomewill be Rs. 7,20,000. This income is Rs. 20,000, more than the prescribed limit of Rs. 7,00,000.
When tax is computed per the new tax regime, the total tax amount is Rs. 27,000. So, does Mr. X have to pay Rs. 27,000 just because their income is slightly more than Rs. 7,00,000? Here is how marginal relief will reduce the total payable tax.
As per the new amendment, Mr. X can get marginal relief as they don't have to pay taxes greater than the excess income. So, they can get a marginal relief of Rs. 7,000 (27,000 – 20,0000). As a result, their total payable tax comes down to 20,000 (27,000 – 7,000).
The marginal relief amount will break even at a taxable incomeof Rs. 7,77,778, after which there will be no rebate. So, you can get marginal relief if your income is greater than Rs. 7,00,000 and less than Rs. 7,77,779.
If Mr. X's total taxable incomeis Rs. 8,00,000 for FY 2023-24 as per the new tax regime, their tax liabilitybased on the new income tax slabs is Rs. 35,000. Marginal relief will not apply here as the payable tax is less than the income over Rs. 7,00,000. So, Mr. X has to pay the full tax amount of Rs. 35,000, and an income tax rebateis not applicable.
Key points to remember when claiming marginal relief are:
Marginal relief is applicable for taxpayers for FY 2023-24 with the new tax regime
Income slightly greater than Rs. 7,00,000 can get marginal relief u/s 87A new amendment
You still have to pay the tax, but it will be significantly lower with the rebate
Marginal relief is the difference between tax amount and the amount over Rs. 7,00,000
Conclusion
Income tax rebate under Section 87Ais available to provide relief for individual resident taxpayers. The new tax regime has increased the taxable incomelimit to Rs. 7,00,000 and offers a rebate of Rs. 25,000. Tax relief regarding rebates will reduce the tax burden for low-income taxpayers. Essentially, it will bring down the tax to zero for anyone with an income up to Rs. 7,00,000. This attractive incentive is offered to promote the adoption of the new tax regime, which will be the default tax regime from AY 2024-25. The rebate will be automatically applied when filing income tax returns. Need help with the e-filing of returns? Check out the TaxBuddy portal to get help from finance experts.
TaxBuddyaims to simplify tax filing using technology and expertise so everyone can file income tax returns in their homes. We act as an e-intermediary between taxpayers and the Income Tax Department by ensuring correct tax calculations, validating tax forms, and completing e-filing procedures seamlessly.
FAQ
Q1. Is income tax rebate available for all taxpayers?
Yes, income tax rebate is applicable for all taxpayers whose annual taxable income is within the threshold limit. If your income is above the threshold limit, you cannot claim the rebate.
Q2. How is rebate calculated under Section 87A while filing income tax return?
As long as the taxable income is under the threshold limit, your tax will automatically become zero and rebate will be applied automatically. As per new tax regime, this effectively translates to zero tax when annual income is Rs. 7,00,000 or below.
Q3. Can I claim rebate for income from all sources?
As per the new tax regime, you cannot claim rebate for income from certain types of sources, such as LTCG from equity mutual funds and mutual fund schemes, gambling winnings, online gaming, etc.
Q4. What is the maximum amount of rebate available as per Section 87A?
For AY 2024-25 and FY 2023-24, as per the new tax regime, the applicable rebate is Rs. 25,000 for income less than Rs. 7,00,000.
Q5. What if my income is slightly greater than Rs 7,00,000 as per new tax regime?
To enable taxpayers to reduce their tax burden, the government offers marginal relief if the income is slightly greater than Rs. 7,00,000. Your tax amount in that case will not be higher than the difference between your actual taxable income and threshold limit of Rs. 7,00,000.
